Source: Resi Mortgage Corporation
Leading non-bank lender Resi Mortgage Corporation says mortgage related insurances are set to become more popular this year as repayments rise and mortgage holders seek to protect their financial ability to keep their property.
Resi’s Head of Consumer Advocacy, Lisa Montgomery, says the current rate climate is likely to jolt some borrowers into action to investigate what protection they can put into place, if the ability to pay their mortgage is affected by an event.
She says: ”The value of having home and contents insurance is already well known but if a borrower can’t continue to pay their mortgage on that property for any period of time, that policy is not much use as they may be forced to sell the very asset they have that policy in place for.”
Montgomery says many borrowers are blissfully unaware of the risk posed to their home if they are rendered incapable of meeting their mortgage repayments because of sickness, prolonged illness, injury or death.
She says: “In short, if they cannot meet their mortgage repayments and they exhaust the hardship provisions of the lender, selling the property may be their only option - unless they have mortgage protection insurance in place.”
She says: “Unfortunately when some borrowers first sign up for a home loan, they mistakenly hear the words Lenders’ Mortgage Insurance and assume that it protects the borrower if they are unable to meet their repayments. But there are in fact two types of insurance related to mortgages – one is mortgage protection for the borrower, whilst LMI protects the lender in case the borrower defaults on their loan.”
Montgomery says mortgage protection policies available today can offer various combinations of income protection and life insurance, paying out the borrower’s outstanding mortgage amount in the event of permanent disability or death; or continuing regular mortgage repayments for borrowers who may be injured or sick for a prolonged period until they recuperate.
She says: “And with mortgages routinely taken out over twenty years, it’s likely that at some point during that time a borrower may be faced with a life-changing event which can instantly impact on their ability to meet their mortgage repayments – so it’s wise to consider taking out this insurance in order to avoid the extreme repercussion of losing your home.”
Montgomery says with property investors also set to pay more for their loans this year they should also investigate insurances specifically related to renting out a property, such as Landlord Insurance.
She says: “Outside of being covered by the limits of a bond paid by the tenant, Landlord Insurance can cover the landlord for loss or damage to their building and contents, or loss of rent or rental default by a tenant.”
Montgomery explains that mounting pressure on household budgets will lead people to review their insurances, including those related to home and contents, car and health.
“So when this is being done it’s important to get the right cover for your particular circumstances, by not paying for benefits you won’t use and by not doubling up on life policies that may be attached to your existing superannuation arrangements,” she says.
Montgomery cautions borrowers to read any policy fine print regarding pre-existing medical conditions and exactly what benefits are associated with various illnesses before making a final and considered decision
MORTGAGE PROTECTION INSURANCE
Mortgage Protection Insurance can combine the benefits of income protection and life insurance into one simple package.
On a large scale, most policies operate by paying out the borrower’s outstanding mortgage amount in the event of permanent disability or death. And on a small scale, for borrowers who may be injured or sick for a prolonged period, income benefits can be paid monthly until the time they recuperate.
Mortgage Protection Insurance is offered by a range of licensed lenders. Borrowers can investigate their options by speaking to their own lender to see if they provide it, or by researching a range of alternatives online.
LANDLORD INSURANCE
Apart from the bond that is required to be paid by tenants to cover any basic damage to a property when they vacate, there are other incidents that can occur that can have a significant financial impact on the landlord who is left to foot the bill.
Landlord Insurance can cover flats, units, apartments and houses which are leased or rented to tenants - and depending on the policy an investor chooses, it can cover the landlord for loss/damage to buildings, contents (if the landlord has leased the property furnished), loss of rent or rental default by a tenant.
Landlord Insurance provides an added level of financial protection for property investors, with policies available through a variety of insurers.
LENDERS’ MORTGAGE INSURANCE
Lenders’ Mortgage Insurance (LMI) is a requirement by lenders where the Loan to Value Ratio (LVR) is generally greater than 80 per cent, so a borrower may be unaware they must pay for LMI as part of the requirement of their home loan.
LMI covers the lender for the shortfall of the price of the property if the borrower defaults on their loan and the property has to be sold.
LMI is obtained through the lender, and involves a one off premium, paid by the borrower at settlement. The premium is generally calculated by taking into account the amount of the loan, the LVR and the value of the property.
As a rule, borrowers should allow for LMI in their budget if they are unable to pay more than twenty percent of the property value as a deposit on their loan.